'The Bank of Japan will go as far as the international community will let them' - John Kicklighter, DailyFX

PROFILE:• Current Job: Senior Currency Strategist for FXCM in New York.• Career: Graduated from the Zicklin School of Business with a Bachelors degree in Finance and Investment. Specialized in combining fundamental and technical analysis with money management.

John Kicklighter is the senior currency strategist for FXCM in New York where he specializes in combining fundamental and technical analysis with money management. John authors a number of regular articles for DailyFX.com, ranging in topics from basic fundamental forecasts for the G10 economies and commodities to more complex subjects like the level of risk sentiment across the financial markets and the carry trade specifically.

John has actively traded since he was a teenager. His experience ranges from spot currency, financial futures, commodities, stocks, and options on all of these instruments for his personal accounts. John graduated from the Zicklin School of Business at Baruch College in New York with a Bachelors degree in Finance and Investment.

What changes do you believe might be introduced to the EU long-term budget, agreed upon at the beginning of February, after it had been deemed unacceptable by the European Parliament?

The MEPs threats to block the agreed-upon long-term budget isn’t much of a surprise given that the divide between countries that have maintained an austerity-direct sentiment and those that are already struggling severely with recessions. Many of the reductions in spending could be open to objection, but few are likely to be backtracked on given the general agreement that debt reduction is necessary for financial stability – something the UK and Germany have specifically driven. That said, there is also an issue with the spending plans and funding commitments. That could become its own issue if further support needs to be given to Cyprus, Greece, Spain, etc. while growth and tax revenues fade.

Will Cyprus be able to finalize the bailout negotiations with international lenders after the presidential elections? Is there a threat of the Eurozone breaking up should the negotiations fail?

The first round of elections weren’t able to draw new leadership, but it suggested there is more support for a pro-euro government. A deal is highly likely for this country, but the issue is how flexible the conservative members will be with Cyprus. They have said repeatedly that Greece’s extreme extraordinary provisions were unique and not to be repeated. Yet, Cyprus looks as if it may need a package that is bigger than the country’s GDP. Further, there is grumbling that the Cypriot banking sector is known as a haven for untaxed funds from Russia – not an appealing bailout for European tax payers. The possibility of negotiations failing is relatively low, but certainly not zero. That said, even if they did fall through and Cyprus exited the Eurozone, it wouldn’t likely spell the end of the monetary union.

Which countries might be downgraded by the top three rating agencies in the upcoming months and what might trigger such actions?

There is a distinct risk that a number of Euro-area countries can find themselves on the downgrade list as the drive into recession meets lower tax revenues that further complicates austerity efforts. Of particular concern on Spain and Italy on that front – though Cyprus and few other periphery members can suffer the same. The UK is the biggest risk as the warnings have already been thrown and speculation is building around the triple dip recession and BoE’s refusal to offset Cameron’s balanced budget drive. A lower probability – but perhaps even more risky – is that probability that Japan could find itself under the ratings axe. Agencies have warned that without a credible plan to reduce its record debts, the sovereign rating will be cut.

EUR/USD up or down? Is the Euro the weakest hand in the currency war?

Refusal to participate in a currency war – explicit or implied – is a good thing. While the Fed is leveraging its monthly program and the BoJ is warming the engines, the ECB is actually seeing its balance sheet contract with LTRO repayments. That in turn boosts the Euro-area market rates which attracts greater interest as long as risk trends are steady. Two things can unseat this trend: sentiment collapses or the ECB indicates it is going to play fiscal counterpart and start upping its stimulus efforts.

How far could the BoJ go? Which is your USD/JPY target in the 1-month windows? Why?

The Bank of Japan will go as far as the international community will let them. Governor Shirakawa and the group’s two Deputy Governors are due to retire on March 19 and it is almost assured that their replacements will be more sympathetic to the government’s wants and needs. Currently, the plan is to initiate a 13-trillion-yen-per-month program that would be unprecedented even in these stimulus-filled times at the beginning of 2014. Naturally, the next escalation of this program is to move the time frame for adoption up. I think that is a good probability. Within a month, we won’t have the critical BoJ meeting – April’s, which will be the first with the new members at the helm – so it is up to risk trends and the market’s interests surrounding the new BoJ Governor’s commentary. I think a risk aversion move could take us on a reversal down to 88 with an extreme move down near 85. But that selloff likely won’t carry too far with USDJPY and we’ll likely settle near 90 soon after.

Is the Euro new confidence hurting the GBP?

The euro’s strength has certainly caused trouble for the pound. One of the lasting appeals of the cable is its role as a regional safe haven (much like the Swiss franc). A history as a reserve currency has long buffered it from rougher seas. However, as the tail risk in the Eurozone deflates and capital is repatriated from foreign safe haven assets, the euro regains ground. That is as true for EURGBP as it is EURCHF. The situation is further complicated by the fact that the UK has found itself plagued by talk amongst the trading and analysis community that the pound is actually losing its safe haven status – while expectations that the BoE is going to play catch up to its Fed and BoJ counterparts weighing it in the near-term.

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